Background
The Inland Revenue Authority of Singapore (IRAS) conducts both risk-based and random audits across all industries to ensure tax compliance by taxpayers. To encourage voluntary compliance, IRAS shares its compliance focus areas for the year so that taxpayers can understand the main compliance issues and what IRAS is doing to address them.
Upcoming Focus on Withholding Tax
On 3 April 2024, the IRAS updated its webpage on Corporate Income Tax Compliance, highlighting withholding tax as a key focus area for its upcoming compliance programme in the coming tax year.
Withholding tax is a mechanism to collect tax on certain types of income of a non-resident that is sourced in Singapore or deemed to be sourced in Singapore. The payer (who is making the payment that is the income of the non-resident recipient) is required to deduct the tax from the payment to the non-resident and remit it to the Tax Comptroller within a stipulated deadline.
Payments Subject to Withholding Tax
There are about 14 types of payments to non-residents that may be subject to withholding tax. Some of the common payments to non-residents that may be subject to withholding tax are:
- interest, commissions or fees in connection with any loan or indebtedness
- management fees
- technical service fees (i.e. payments for the rendering of assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information)
- rent or other payments for the use of any movable property
- royalties or other payments for the use of or the right to use any movable property
- payments for know-how (i.e. payments for the use of or the right to use scientific, technical, industrial or commercial knowledge or information)
- director’s remuneration
- professional fees.
Notwithstanding the above, certain payments made to non-residents are exempt from withholding tax. For example, payments such as interest, commission, royalties, or management fees paid to Singapore branches of non-resident companies are specifically exempt from withholding tax.
A reduced withholding tax rate or withholding exemption may also apply under a relevant Avoidance of Double Taxation Agreement (DTA) or the Approved Royalties Incentive (ARI).
Withholding Tax Compliance
Once it is ascertained that that withholding tax is applicable to a specific payment, the withholding tax must be filed and paid by the 15th of the second month following the date of payment to the non-resident.
For all payments except for director’s fees, the date of payment is defined as the earliest of the following dates:
- when the payment is due and payable based on the agreement or contract, or the date of the invoice in the absence of any agreement or contract (credit terms should not be taken into consideration)
- when payment is credited to the account of the non-resident or any other account(s) designated by the non-resident
- the date of actual payment.
The determination of the date of payment for director’s fees varies slightly from the above.
The withholding tax form (Form IR37) can only be filed electronically, and taxpayers are required to access the S45 Withholding Tax (Filing) digital service on the IRAS’ myTax Portal for the filing. Payment of the applicable withholding tax must be made to IRAS at the time of filing unless the taxpayer is on General Interbank Recurring Order (GIRO) for withholding tax payment.
Even if withholding tax exemption can apply under a relevant DTA or ARI, the Singapore payer is still required to submit the withholding tax form electronically to IRAS.
If benefits under a relevant DTA, such as reduced withholding tax rate or withholding tax exemption, are sought, the foreign payee is required to submit the Certificate of Residence (COR) to the Singapore payer for onward submission to IRAS. This is to substantiate that the payee is a tax resident of the treaty jurisdiction.
Accounting and business records, source documents such as contracts, invoices, payment vouchers and receipts must be maintained for at least 5 years in accordance with the records retention requirements set out in the IRAS’ Record Keeping Guide for GST-Registered Businesses, Record Keeping Guide for Non-GST Registered Businesses and Simplified Record Keeping Requirements for Small Businesses.
Consequences for Late Payment or Non-payment of Withholding Tax
A 5% late payment penalty will be imposed if withholding tax payment is not received by the due date. If the tax remains unpaid 30 days after the payment due date, an additional penalty of 1% per month may be imposed for every completed month, up to a maximum of 15% of the unpaid tax, that the tax remains unpaid.
IRAS may also appoint agents like the taxpayer’s bank or other third parties with money due to the taxpayer, to recover the overdue tax. In some cases, legal action may be taken against the taxpayer.
Common Withholding Tax Mistakes
IRAS has shared on its website the common withholding tax errors made by taxpayers. Some of the errors highlighted are:
- wrongly declaring the date of payment to the non-resident
- wrongly declaring that tax was borne by the payer when tax was withheld from the amounts payable/paid to the non-resident
- failing to file withholding tax when claiming tax exemption under a DTA
- filing and paying withholding tax only after receiving the COR
- submitting the COR of the non-resident based on the withholding tax filing date instead of the period of payment declared in the withholding tax form
- remitting the tax withheld to IRAS without/before filing the withholding tax form.
Voluntary Disclosure of Past Withholding Tax Errors
Companies that have failed to comply with withholding tax requirements are encouraged to make a voluntary disclosure to IRAS before the errors are uncovered in an audit, to benefit from reduced penalties. No penalty will be imposed on withholding tax errors disclosed within 1 year from the withholding tax filing deadline (1-year grace period). For voluntary disclosures after the 1-year grace period, a reduced penalty of a flat 5% of the outstanding withholding tax will be imposed.
What Taxpayers Can Do
In light of the IRAS compliance focus on withholding tax, taxpayers can conduct a self-review to identify errors and do a voluntary disclosure to mitigate or reduce penalties. The following are some general tips. Please note that these suggestions are not exhaustive and should be considered as broad guidance.
As a start, taxpayers can begin by identifying all payments made to non-residents. This can typically be done by setting filters in the accounting system for foreign payee names, foreign addresses, international bank details, or payment codes that are used for international transactions. It is important to ensure that the accounting software is configured to tag and track these types of transactions accurately. Regular updates and reviews of these categories will help capture all relevant payments made to non-residents and form the basis for determining any applicable withholding tax obligations.
Subsequently, these payments should be reviewed to determine if withholding tax will apply to any of them. There is no single withholding tax rate applicable to all payments. The withholding tax rate (under domestic tax law and tax treaties) differs based on the nature of the payment. Therefore, accurately characterising the nature of each payment is essential to applying the correct tax rate. Importantly, the determination of the nature of a payment for withholding tax purposes should not depend on how the payment is classified for accounting purposes. Instead, it should be based on its legal characteristics to ensure the correct withholding tax treatment.
Sometimes, payments of different natures, such as royalties and service fees may be grouped together under a single agreement or invoice without a breakdown. In such cases, it is important to determine the amount that should be attributed to the various components outlined in the contract and apply the appropriate tax treatment to each component.
For those payments that are subject to withholding tax, it is also necessary to verify whether the withholding tax could be exempt or reduced, either under the Singapore domestic tax law or an applicable DTA.
This initial assessment should help identify whether the taxpayer has inadvertently failed to withhold tax on payments subject to withholding tax.
Even if the initial assessment does not reveal any exceptions, a further review should be conducted to ensure the following:
- The correct withholding tax rate has been applied. This depends on factors such as the nature of the payment made to the non-resident, whether the conditions for a reduced rate under domestic tax law have been met and whether the non-resident recipient has a permanent establishment in Singapore.
- If a tax exemption or a lower withholding tax rate has been applied under a valid DTA, verify that the conditions for these benefits have been satisfied and documented.
- Determine whether the payer or the payee should bear the withholding tax. If the payer bears the tax, a gross-up computation is necessary.
Where necessary, taxpayers can also seek an advance ruling from the IRAS on whether a certain type of payment is subject to withholding tax especially when there is ambiguity surrounding the nature of the payment.
Conclusion
Withholding tax applies to specific transactions, and companies may occasionally overlook the need to withhold tax. Sometimes, this oversight can result from voluminous transactions or a lack of controls to identify payments that are potentially subject to withholding tax. Recognising that taxpayers may occasionally make errors, IRAS encourages companies to leverage the voluntary disclosure programme, which offers reduced penalties. As such, conducting a comprehensive withholding tax compliance “health check” regularly can help identify errors and ensure ongoing compliance with withholding tax regulations in Singapore. There are other voluntary compliance initiatives by IRAS that taxpayers may put in place, which provide additional benefits such as an extended grace period for the voluntary disclosure of errors. Taxpayers are therefore encouraged to adopt a proactive approach towards withholding tax compliance, actively improving their tax control environment to identify and comply with the necessary requirements.
